The prevalence of stock ownership guidelines among companies reviewed is approximately 93%, showing a slight uptick since 2010, when approximately 89% of companies had stock ownership guidelines in place. Between 2010 and 2013, companies with both stock ownership guidelines and stock retention requirements increased to 44% from 22%, while the prevalence of having only stock retention requirements remained flat at 5%. The number of companies with no form of stock ownership guidelines or stock retention requirements decreased to 2% from 5%. Companies are demonstrating increased efforts toward good corporate governance by ensuring executives hold a meaningful amount of equity.

The most common stock retention requirement is to require executives to hold shares until a stock ownership guideline is achieved (34 companies). Implementation of stand-alone stock retention requirements that apply even after a stock ownership guideline has been achieved (25 companies) is a growing trend that we have seen over the last 3 years.

Prevalence of Different Forms of Stock Retention Requirements (n=49)

EXAMPLES OF STOCK RETENTION REQUIREMENTS

Stand-alone stock retention requirement only: AT&T

“Executive officers are required to hold 25% of the AT&T shares they receive (after taxes and exercise costs) from an incentive, equity, or option award granted to them after January 1, 2012, until one year after they leave the Company.”

“If at any point the ownership guideline is not met with shares otherwise owned by the executive, the executive would be required to retain 50% of the net profit shares resulting from previously granted equity-based long-term incentive plan awards that are exercised or vest as applicable. Additionally, once an executive has met the minimum share ownership levels, they are also required to retain an amount equal to 25% of the net profit shares resulting from equity-based long-term incentive plan grants for five years from the date of exercise for stock options or the date of vesting for other awards.”

“Executives not meeting the requirement must retain 50% of after-tax shares acquired through stock compensation programs until the requirement is reached.”

STOCK OWNERSHIP GUIDELINES

83% of companies express stock ownership guidelines as a multiple of salary and 13% express guidelines as a fixed number of shares. Fixed share guidelines tend to be more prevalent in the Financial Services (50%), Technology (33%), and Retail (33%) industries. Companies that use a fixed share approach generally have a volatile stock price, so locking in on a number of shares helps mitigate the potential challenges of meeting the stock ownership requirement.

Stock ownership guidelines for CEOs have increased since 2010, with the median requirement increasing from 5x to 6x multiple of salary in 2013. The median fixed share guideline also increased to 250,000 shares compared with 150,000 shares in 2010. This suggests that companies may be increasing their fixed share guidelines to align with companies that have adopted higher multiples of salary. In 2013, the median stock ownership requirement value for the CEO is $7.7M compared with $6.7M in 2010, a significant increase of approximately 15%.

CEO Stock Ownership Requirement

2013 (n = 100)

2010 (n=99)

25th %ile

50th %ile

75th %ile

25th %ile

50th %ile

75th %ile

Multiple of Salary

5x

6x

7x

5x

5x

6x

Fixed Shares

125,000

250,000

500,000

100,000

150,000

300,000

Total Value

$6.3M

$7.7M

$9.7M

$5.4M

$6.7M

$8.6M

Most companies require executives to achieve an ownership guideline requirement within 5 years. Thirteen companies (14%) disclosed a penalty for not achieving the required ownership level. The most common penalties for non-compliance include restrictions on selling shares (75% of companies), followed by reductions in future total compensation (25% of companies).

When determining which shares count towards ownership requirements, companies must consider whether to include unvested full-value shares, unexercised options or unearned performance shares. Of the companies reviewed, 69 out of 93 disclose the type of shares that count toward the guideline. Approximately 40% of companies count unvested restricted stock toward the requirement, (up from 33% in 2010) and less than 10% count unvested options or vested but unexercised options.

Shares Counting Toward Guideline Requirement

2013 (n = 93)

2010 (n = 99)

# of Cos

% of Cos

# of Cos

% of Cos

Shares directly owned

65

70%

55

56%

Shares in 401(k) plan

37

40%

33

33%

Unvested restricted stock

36

39%

33

33%

Shares indirectly owned

32

34%

29

29%

Deferred compensation

26

28%

25

25%

Vested but unexercised options

7

8%

6

6%

Unvested options

1

1%

1

1%

Not disclosed

24

26%

29

29%

Note: Percentages add up to greater than 100% due to multiple types of equity counted by various companies.

Companies generally do not count unearned performance shares toward stock ownership guidelines. It is more common to included unvested restricted stock, as the eventual vesting of these shares is much more certain, since achievement of performance hurdles is not guaranteed.

STAND-ALONE STOCK RETENTION REQUIREMENTS

Companies with stock retention requirements most often require executives to hold net shares from option exercises, restricted stock share/unit vesting or performance share payouts. Requiring executives to hold net shares for one year post exercise or vest (64%) has remained the most prevalent holding period, increasing from 46% prevalence in 2010. Other companies require executives to hold shares for a 1 year period post-retirement (20%), while fewer companies require shares to be held until retirement (8%).

Period Subjectto Hold

2013 (n = 25)

2010 (n = 24)

# of Cos

% of Cos

# of Cos

% of Cos

1 year post exercise/vest

16

64%

11

46%

2 years post exercise/vest

0

0%

1

4%

Retirement

2

8%

8

33%

Post-retirement

5

20%

1

4%

Other

2

8%

4

17%

Not disclosed

0

0%

1

4%

Note: Holding requirement only for companies with stand-alone holding requirement. Percentages may add up to greater than 100% due to different holding periods for the CEO vs. other NEOs.

STOCK RETENTION SHAREHOLDER PROPOSALS

While companies may maintain stock ownership guidelines and/or stock retention requirements, they are not shielded from receiving shareholder proposals that require executives to hold a meaningful percentage of equity until requirement. Among the Russell 3000, 30 companies in 2014 and 46 companies in 2013 received shareholder stock retention proposals. In all cases, the proposals failed or were withdrawn. The median level of shareholder support for these proposals was less than 25%.

22% of companies disclosed making a recent change to their stock ownership guidelines. Of those companies that modified their guidelines, the two most common changes were adopting a stock holding requirement (32%) and increasing the ownership guideline (27%).

SUMMARY

In 2014, companies continued to practice good governance by enhancing their stock ownership guidelines. Additionally, companies continue to implement stock retention requirements, albeit at a slower rate. Stock retention requirements most often serve as a supplement to existing stock ownership guidelines. Overall, we expect companies to continue to strengthen their stock ownership and stock retention requirements because these policies address issues important to both shareholders and proxy advisory groups, and align executives with shareholders.

For the 114 company sample, median revenue was $30B, median market capitalization was $29B and median Total Shareholder Return (TSR) was 3% for 2011.

What We Found

Companies have modified their stock ownership guidelines and stock retention (or holding) requirements to enhance their governance practices. Median value of CEO stock ownership guideline has increased to 6x base salary, also more in line with Institutional Shareholder Services’ (ISS) definition of “robust” stock ownership. Overall, the use of stock retention requirements increased to approximately 1/3 of companies, while the use of stock retention requirements alone is flat year over year.

The prevalence of stock ownership guidelines (approximately 90%) among companies in our database remained relatively flat in 2011 compared to findings in 2010. Companies with both stock ownership guidelines and stock retention requirements increased to 36% (from 22%), demonstrating increased efforts towards good corporate governance. However the prevalence of companies with stock retention requirements only stayed relatively flat year over year at 4%.

Of the 46 companies with stock retention requirements, nearly half (52%) of the companies report retention requirements that are linked to stock ownership guidelines (e.g., companies must hold shares until the stock ownership guideline level is achieved). Companies with stand-alone stock retention requirements that are not linked to stock ownership guidelines decreased slightly to 48% in 2011 (vs. 57% in 2010).

Stock Ownership Requirement

Similar to 2010, most companies (approximately 80%) express stock ownership guidelines as a multiple of salary and 15% express guidelines as a fixed number of shares. Fixed share guidelines are more prevalent in the Financial Services (57%), Technology (31%) and Retail (27%) industries.

CEO Stock Ownership Requirement Prevalence

2011 (n = 104)

2010 (n = 99)

# of Cos

% of Cos

# of Cos

% of Cos

Multiple of Salary

84

81%

80

81%

Fixed Shares

15

14%

15

15%

Lesser Of Approach

3

3%

2

2%

Other

2

2%

2

2%

Stock ownership guidelines for CEOs increased from 2010, with the median CEO requirement increasing from a 5x multiple of salary to 6x salary in 2011 (See chart below for details). The median fixed share guideline also increased to 175,000 shares from 150,000 shares in 2010. This median requirement suggests that companies may be increasing their guidelines to respond to shareholders and provide more favorable optics. For several industries, however, (i.e., Automotive, Financial Services, Healthcare and Retail) the median CEO stock ownership guidelines of 5x salary was the same year over year.

The median stock ownership requirement value for the CEO increased modestly to $7.0M in 2011.

CEO Stock Ownership Requirement

2011 (n=104)

2010 (n=99)

25th %ile

50th %ile

75th %ile

25th %ile

50th %ile

75th %ile

Multiple of Salary

5x

6x

6x

5x

5x

6x

Fixed Shares

120,000

175,000

300,000

100,000

150,000

300,000

Total Value

$5.7M

$7.0M

$9.7M

$5.4M

$6.7M

$8.6M

Most companies require executives to achieve the guideline requirement within 5 years. 20% of companies in our database disclose a penalty for not achieving the required ownership. Common penalties for non-compliance include restrictions on selling shares, requiring annual bonus or performance cash awards to be paid in shares and reducing future total compensation.

74 of 104 companies disclose the type of shares that count toward the guideline. While approximately 40% of companies count unvested restricted stock toward the requirement, less than 10% of companies count unearned performance shares or unvested stock options. These findings are similar to our findings in 2010.

Shares Counting Toward Guideline Requirement

2011 (n = 104)

2010 (n = 99)

# of Cos

% of Cos

# of Cos

% of Cos

Shares directly owned

72

69%

55

56%

Shares in 401(k) plan

49

47%

33

33%

Unvested RS

43

41%

33

33%

Shares indirectly owned

36

35%

29

29%

Deferred Compensation

33

32%

25

25%

Vested but unexercised options

11

11%

6

6%

Unearned performance shares

7

7%

5

5%

Unvested options

5

5%

1

1%

Not disclosed

30

29%

29

29%

Note: Percentages add up to greater than 100% due to multiple types of equity counted by various companies.

Note: Percentages add up to greater than 100% due to some companies requiring that multiple forms of equity be held.

Most companies require executives to hold net shares after exercise or vesting for a period of 1 year (41%) or through retirement (25%). Few companies require executives to hold shares post-retirement (13%), although the prevalence has increased from 2010.

Period Subjectto Hold

2011 (n = 32)

2010 (n = 24)

# of Cos

% of Cos

# of Cos

% of Cos

1 year post exercise/vest

13

41%

11

46%

2 years post exercise/vest

1

3%

1

4%

Retirement

8

25%

8

33%

Post-retirement

4

13%

1

4%

Other

4

13%

4

17%

Not disclosed

3

9%

1

4%

Note: Reflects companies with stock retention requirement only. Percentages add up to greater than 100% due to one company requiring different holding periods for CEO and other NEOs.

Disclosed Stock Ownership Guideline Changes

Approximately 20% of companies disclose changes to their stock ownership guideline requirements for 2011 or for 2012. A majority of these companies (55%) increased the ownership requirement for at least one NEO. Other notable changes include the addition of retention requirements (32%) and requiring a more stringent definition of shares that count toward the stock ownership guideline (9%).

Changes to Stock Ownership Guidelines

2011 (n = 22)

2010 (n = 25)

# of Cos

% of Cos

# of Cos

% of Cos

Increased guideline requirement

12

55%

12

48%

Added holding requirement

7

32%

6

24%

Modified shares counting toward guideline

2

9%

n/a

n/a

Modified penalty for non-compliance

1

5%

5

20%

Newly adopted

1

5%

1

4%

Adopted mandatory holding of shares through retirement

1

5%

1

4%

Extended Participation

1

5%

n/a

n/a

Decreased guideline requirement

1

5%

n/a

n/a

Note: Percentages add up to greater than 100% due to multiple changes by several companies.

Summary

In 2011, companies made modest changes to their stock ownership guideline requirements; most often in an effort to make them more robust. Additionally, companies continue to implement stock retention requirements, albeit at a relatively slow pace, to enhance their governance practices. We expect companies to continue to adopt and implement stock retention (holding) requirements and to increase their stock ownership guidelines. Both of these policies address issues that are important to shareholders and proxy advisory groups, and further align senior executives with shareholders.

While approximately 40% of companies count unvested restricted stock toward the requirement, less than 10% of companies count unearned performance shares or unvested stock options. These findings are similar to our findings in 2010.

In 2011, companies made modest changes to their stock ownership guideline requirements; most often in an effort to make them more robust. We expect companies to continue to adopt and implement stock retention (holding) requirements and to increase their stock ownership guidelines.

Compensation Advisory Partners (CAP) is a leading independent consulting firm specializing in executive and director compensation and related corporate governance matters. Our consultants have served as independent adviser to Boards and senior management at many leading companies in the areas of compensation strategy, program design and in promoting sound corporate governance principles.